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Around the ’50s a political ideology formed. I’m sure its ideas date back further but it was at this time that it crystalised into a coherent group. More than a political ideology, it was, and is, a worldview. This worldview has no explicit pop-culture presence. No-one preaches it overtly. So most people are unaware of it directly. However it was, and still is, insidiously influential on the thoughts of some important people.

One of the most basic assertions/assumptions of this worldview is what is technically called strong reductionism. This is the idea that any system is just the sum of the elements in the system. Put plainly: to understand a society you have to only understand individuals. So, for example, if crime increases by 10% then the explanation is that individuals like crime by 10% more than before. It is this idea that lead Thatcher to believe and proclaim that “there is no such thing as society.” What she meant is that society is a kind of academic myth. A mirage created by a bad understanding of the world.

I don’t know how but this worldview has filtered out into popular culture. The world is confusing right now, and confusion both inspires and demands analysis. Reading the never-ending stream of analyses of how we got here, on racism, on sexism, on equality, on social justice, I have noticed that the worldview I mention is encoded right into all of them, and it makes these analysis irrelevant because they’re blind to the biggest factors.

These analyses seem mostly to try to reduce behaviours of societies down to how individuals think and act. Attributing things to individuals is difficult, as there are billions of them, so this approach necessarily requires demographic segmentation i.e. stereotypical thinking (which is ironically often what the analysis is out to criticise.) You have to find the demographic group whose behaviour, or thoughts, or opinions can reasonably be said to contain the behaviour you are trying to explain. I say reasonably because these analyses are usually only opinions; what the writer thinks is a reasonable explanation is accepted, usually without any actual evidence, instead relaying on the reader liking the sound of the conclusion. How many “why Trump got elected” videos and articles have you seen? Few provide any causal evidence, most only provide demographics as data masquerading as evidence. These are plentiful and have, undoubtedly, already coloured peoples ideas of how the world works.

This approach to understanding the world is limited to specific types of conclusions. If the phenomena we are most concerned about are recent this type of analysis can only conclude that the difference in our society is obviously the fault of whichever group represents the biggest recent demographic change; millennials. Things like institutional racism or sexism are incomprehensible because those phrases don’t mean anything. How can an institution be racist if none of the individuals in the institution are guilty of overt racism? How can we even approach fixing a sexist education system if none of the parts of that system are being sexist? How can inhuman labour practices be an issue if everyone working in the factories chose to work there?

Strong reductionism is bullshit. It was shown, with actual maths, to be bullshit over 100 years ago. The hard sciences, you know, the people who put robots on comets millions of miles away, predict weather with miraculous precision, run optical cables across the ocean floor, create self-driving vehicles, use general relativity to account for transmission distortion in communication between machines in geo-stationary orbits, put the magic machine you are looking at in front of you, those people, dropped strong reductionism at that time and never looked back.

If you want to understand radical changes in the behaviour of our society in the last decade there is an elephant in the room: social media. Social media itself mediates the new social interaction. The important word there being interaction. Interaction is not a feature of individuals so strong reductionist worldviews are blind to it. For them interaction is effectively inert. It just transmits benignly, having no overall effect on behaviour. It can express behavioural traits, that’s it.

When the world, apparently in unison, listens to Gangnam Style then a month later ritualistically pours buckets of water over their heads, what does that tell you? That everyone woke up one morning and decided they like songs about Korean horse farming, then changed their mind and really wanted to pour whatever over their heads and social media was just there to record it? Or is it a more feasible explanation that those things went viral largely because of the nature of social media itself? So many variables in that process are obviously part of how social media and the internet themselves work and cannot be reduced to individuals at all. If social media didn’t exist, but every music shop in the world sold copies of Gangnam Style one day, would people have bought it? There is clearly another factor at play here that isn’t just peoples’ traits.

There is a motion that fake news, transmitted by social media, was a large factor in recent political events. You might think that this is an example of a break from the worldview above because it is laying blame at Zuckerberg’s feet. Maybe it is, but this analysis, again, seems to be about the content traveling around social media rather than the system itself. The system is at fault in that it contains this type of content. It is recognised that social media creates filter bubbles in which our view of the world is coloured to match our outlook, biasing our opinions. Again, this looks at the situation in terms of individuals. Social media biases the individual, or more accurately the individual biases themselves using social media, which manifests itself as a societal bias. Social media is just providing a way for individuals to do what they as individuals want to do, but if that is true there is no bias… ta da!

This is, I’m sure, a factor but it’s an incomplete story. Social media filters content based on two broad factors: the user’s interaction with it and marketing revenue. So if we like things that steers social media’s shaping of the filter bubble but what we like is a function of our social interaction, which is itself mediated by social media and distorted by our filter bubble. It might sound like I have added nothing to this analysis. The first says “A affects B”. Mine says “A affects B which affects A”. I’ve just pointed out a feedback loop made from the same elements, but that feedback loop is an important extra element. Put a feedback loop in a speaker-microphone system and you get a loud, shrill whine, right? That screechy noise isn’t a product of the singer, or the mic, or the speaker, or the cables; it’s a product of those things combined. It’s exact pitch is a product of the properties of all of those things and it’s volume is a product of their interaction. You can sing a different song but you’ll still get the same pitch. The only way to get rid of it is to get rid of the feedback loop.

We all see definite polarisation on most important issues. The standard analysis is, again, that two groups form, and the difference in opinion between the two sums to the outlook of the society. And again we are ignoring interaction. What people miss out is that both sides have a vested interest in portraying the other side as as crazy as possible. So most of the examples of either side are actually picked out by the other side. Those articles about air conditioning being sexist, a woman with 40 kids on benefits, people complaining about a movie poster, outrage about this and that, political correctness gone made, are in every case minor incidents involving a handful of people selected by the other side and made viral. Then the analysis that follows is based on data handed over by this process. Apparently the worlds leading experts on gender equality are all well-off white men who think that feminists are all men hating nut-cases; a conclusion based on a biased view of the world provided largely by a social media system designed to respond to those opinions by shaping its filters to make the world look more like that view!

In technical science systems with feedback loops have a mathematical property called non-linearity. They’re called complex systems because they have complex and often weird behaviours. The properties of these systems are well understood by people whose opinions no one cares about, and are unknown unknowns to a huge number of people whose opinions that shape our society. You probably aren’t aware of this but the idea of strong reductionism is axiomatic to all neo-classical economics, which includes all the ideas about how economies function in official practice right now. It’s embedded in the university curricula studied by many of our government ministers, although to be fair they probably didn’t pay much attention.

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The UK’s £1.7 billion surcharge is the big thing in UE/UK news right now. It’s in the interests of Cameron and Osborne to present this surcharge as a serious problem for two reasons. Firstly, because it presents the EU in a negative light forcing us to part with pounds at a time when we need them all, and secondly because it’s an opportunity to spin themselves as heroes, even if only in that they publicly resist it. Although they managed to totally **** that up. ALittleEcon describes the situation here.

The question is why should we be worried about this? Well, as far as I can tell even if paying the surcharge causes a problem for us, which is questionable, the problem is not at all what we are supposed to think it is.

We are supposed to imagine that we can only pay this bill if we give something else up. We need to give up a hospital or something. What actually happens when the government pays this bill? Someone at the Bank of England opens a spread sheet, finds the row that represents the EU’s bank account, and increments it by 1.7 billion. That’s it. They don’t have to raid any savings, or some budget. They don’t have to find a pile of cash somewhere. There is no bank account they withdraw from. They just press some keys and that’s that. No budgetary effects at all. If they then choose to subtract the same amount from somewhere else that’s purely up to them. Incidentally, the talk about the interest that might or might not be incurred is ridiculous. The government can pay that bill any time they want regardless of how big it is, so if they could only be forced to pay late fees if they choose to put off paying it, but there is no intrinsic reason for them to wait. Again, they don’t have to get the money from anywhere.

The EU can then do two things with the pounds in that account. They can buy things from the UK or they can trade it on the currency exchange market. If they buy things from us then, obviously, the pounds go right into one of our bank accounts. That would have some effect on prices. What effect? No-one has of yet provided a model to figure that out so there is no way to know. Anybody buying anything has a similar effect but we rarely stress about that.

The only clear effect of our government issuing the pounds needed to pay the surcharge is it’s effect on the exchange rate. You have to accept that the law of supply and demand holds, which is shaky but, assuming it does, if we increase the supply of pounds by some factor then it’s value should drop by the same factor. If we double the number of pounds in circulation then we would halve it’s value. In theory… which they call a law. So the magnitude of the effect is equal to the magnitude of the change of supply… right? We know the change is £1.7 billion, but what’s the total supply of pounds? If you go to the Bank of England website they have data on this. I think it’s at about £1.5 trillion. That puts this theoretical total effect on exchange rates in the range of about 0.1% over some period of time. To put this in perspective the Pound:Euro exchange rate has moved around over a range of 10% over the last couple of years. We’d have to issue 100 times this surcharge just to get back to 2012 rates.

Would this flicker in exchange rates be bad? Who knows. It would (again assuming theory holds) make imports more expensive and exports more profitable. Is this enough to warrant offsetting the pounds placed in the EU’s bank account by taking the same number away from some other public services? Given that our public services are being strangled to death through lack of investment I imagine that the theoretical exchange rate blip is a better choice.

 

 

I generally agree with what Harris said in The Moral Landscape. I thought a lot of the bad press he got over it wasn’t deserved simply because his book was largely a set of thought experiments; interesting as academic pursuits. As far as applying them to the real world goes not much was given. It’s defensible that what’s moral is an empirical, and therefor scientific, question, but what tools does that give us in the real world? I don’t know. 

So it’s interesting to look at how Harris himself approaches real-world issues just to see how it links back to his book. I’m not really sure how it does and what he has said gives the impression that if his position is based on his moral theorising it has left him unable to see an invasion as an invasion. In this blog post he starts out by arguing something like “in wars all bets are off, people do bad shit”. Maybe, but applying that to what’s happening in Gaza is extra-ordinarily misleading. He made this point in response to Israel’s record of war crimes. The vast detail he doesn’t mention is that all the terrorism and crimes against Israel that are given as pretexts to murder are the result of it’s invasion, blockade and siege of Palestine. Even the existence of Hamas itself is arguably the result of Israel’s war crimes. According to the Nuremberg Military Tribunal a war of aggression “is the supreme international crime, differing only from other war crimes in that it contains within itself the accumulated evil of the whole.” 

You have to ask yourself, given Harris’ recent history as a champion of reason: what is the reasonable response to terrorism? Is it murdering people who had nothing to do with it? If there is a way to stop it without killing people should that be the first option open to a reasonable mind? International law is clear on this. Another detail Harris ignores. Israel has the right to defend itself and everyone with any understanding of terrorism or security or the situation in Palestine understands exactly how Israel can stop all the terrorism right now: call off their invasion, blockades and sieges and go home inside Israel’s borders. They accidentally did this already. Hamas agreed to a cease-fire, which Israel totally violated by implementing blockades, another war crime, during which Hamas completely stopped rocket fire into Israel. So they could just do that, forever this time. Even if Israel was justified in using aggression, which it’s not, it would still be guilty of breaching the Geneva Convention, which explicitly forbids transfer of population into occupied land. You have to understand that war is declared against states, not people or land. The threat is the state and once the state is pacified the threat is gone. Even declaring war doesn’t give a state de facto right to take any region over.

Harris’ entire thesis in The Moral Landscape is that morality comes down to suffering versus well-being. With that in mind read the following:

Consider how we behaved in World War II: We did things that would now constitute the worst war crimes imaginable—the firebombing of Dresden, the nuclear weapons dropped on Hiroshima and Nagasaki. We literally burned hundreds of thousands of noncombatants alive. Was all that carnage strategically necessary? I don’t know—probably not. And we certainly couldn’t behave this way today without invoking the wrath of billions of people. However, the crucial question is, what sort of world were we trying to create? What were the real intentions of the U.S. and Britain with respect to Germany and Japan? Well, you saw our intentions after the war: We helped rebuild these countries. Out of the ashes of this war, we created the allies we deserved. The truth is that we wanted to live in a peaceful world with thriving economies on all sides.

He seems to have stopped slightly short of saying burning people to death is OK so long as you have a nice idea in mind, OK so long as we “create the allies we deserved.” I’ll give him the benefit of the doubt and assume he didn’t mean that. Even to argue that intention is the crucial question seems to be a total deviation from his moral theoretics. It’s not the issue of killing people nor the issue of whether any of it was strategically necessary that’s central, we should look away from that, it’s the issue of intention that is crucial. 

So let’s talk about intentions. The current escalation in Gaza started with the abduction of some teenagers from Israel. Actually, not exactly… they were abducted form the occupied West Bank, not Israel. Netanyahu immediately blamed Hamas and ordered a search in Gaza. Israeli soldiers started arresting people in Gaza, something like 800, no-one has since mentioned this, the biggest kidnapping ring in history. Not surprisingly this investigation pissed people off. You can imagine what would happen if foreign soldiers showed up in New York and arrested 800 people. Shortly after it was discovered that he knew that they were dead before starting the investigation. It was then revealed that his own people thought that the culprits probably weren’t receiving orders from Hamas; which was later confirmed. People get kidnapped and murdered all the time, do countries usually go to war over it? Why does Harris, a self defined supporter of reason, have nothing to say about such unreasonable behaviour? And if we are supposed to be interested in intentions: what are the intentions powering Israel’s actions? It seems murderous irrational belligerence. 

The key to understanding how our economic systems work is really to realise that most of what is said about it is irrelevant bullshit. The more I learn about our money systems the more I realise that it is, as a high-level system, not very complicated and easy to understand. That isn’t the same as saying it isn’t complex or that it’s easy to predict. You shouldn’t confuse complicatedness with complexity. Take, as analogy, the weather. Weather systems are complex but despite that you can still take it for granted that it’s colder when it rains. There’s no hidden property of weather systems that messes up that simple rule, and you don’t need to model precise rainfall to come to that conclusion (except, perhaps, rain falling through a volcano eruption).

Which is why, to me, the title of this post isn’t controversial. It fact it’s about as insightful as saying “circles lack corners.” It’s really just a deductive statement about what the words in it mean:

The thing that issues money, whatever it is, is running a deficit.

This throws a spanner in the cogs of those who take the position in favor of what is called either monetarism or austerity, depending on your memory span. Everyone aggress that we need money. It seems a pretty effective means of resource management. No-one has had a better idea. But, many are ideologically apposed to state spending. At the extreme end there are those who want a metal standard implemented in order to make it impossible for the government to run deficits over the long term, requiring them to fund deficits with surpluses.

Imagine: The gold standard is in effect. You go into your garden, stick a shovel in the ground, and pull a pound’s worth of gold out of the earth. Let’s say you have a magic machine that turns it into a pound coin for free. Now, it’s not in circulation until you circulate it. You have two options: spend it or give it away. Pick one. You just ran a £1 deficit.

I think the first instinct, for most, would be to point out that you bought a pound’s worth of stuff. That is true, but that would be a real asset. Real assets aren’t part of a deficit, which makes sense given that they have no price until they flow. A deficit is negative cash flow. Money in minus money out. Of course the word ‘deficit’ can be used to mean anything, but it has a technical definition, and that is the definition used when people refer to the government’s deficit. If you don’t believe me go and check your government’s treasury FAQ.

The eagle eye might be drawn to the point that, although you lost £1, you gained £1 to start with, so your cash-flow is zero. This is shady given that the pound doesn’t sit anywhere on a cash-flow account, you didn’t gain it through a transaction, you just issued yourself it. Anyone can issue themselves money whenever they want, it doesn’t usually show up on a cash-flow account. But even if that argument holds then you’ve just proved that the government isn’t running a deficit, because it creates the pounds that fund it, else how could it spend them?

 

When it comes to organising society the fundamental question is really “what do we want members of society to do?” The answer to that question forms the basis of figuring out the nature of the systems we need to implement to direct behaviour (or not). Whether you believe in free-market capitalism, socialism, totalitarianism, feudalism or monarchy you have gone through this reasoning process (or your argument is incoherent.)

Do we want members of society to waste resources? Most would say no. Again, even free-market capitalist’s argue that a free-market is favourable because it allocates resources efficiently and therefor avoids waste.

Bitcoins are useless. You can’t eat them. They don’t cure any diseases. You can’t turn them into anything. No production process requires them. They can’t make people happy or better off or more ‘well’. They exist solely to be traded for something else. Accepted economic theory holds that they are demanded simply because they are in limited supply. I would argue that it’s more precise to say that they are demanded because people believe they can make a profit (or minimise loses) trading them. At least some Bitcoin users must want to make a profit else no Bitcoins would get produced. Bitcoins are just a speculative asset. They are the tokens you need to play the Bitcoin speculation game. Some people might just really want Bitcoins, however it’s more reasonable to assume that people  mostly produce Bitcoins because they can trade them for prizes at a profit. Note that profit is always someone else’s loss.

While Bitcoins themselves are useless, they require resources to ‘produce’. The production process is the execution of a mining algorithm. This process requires energy; if the energy costs are too high there’s no profit to be had producing them. As  a result Bitcoin production is going industrial. Production of Bitcoins has a (potentially huge) carbon footprint and requires allocation of physical resources that could be used for other things. For example the computers running the mining algorithm could be running a protein folding simulation, crunching astronomical data or whatever we can think up.

So, putting all of this together:

Bitcoin is a way to get people to tie up physical resources to produce entities that exist for no reason other than as a means to transfer physical resources into their possession. 

We have produced a system that encourages people to tie up resources in order to gain resources while doing literally nothing productive. You could argue something similar about gold coins; but at least an argument could be made (IMO an invalid one) that the upside is we get gold out of the ground. Not even this upside exists for Bitcoins. Bitcoins are literally useless whether we have them or not.

I had a discussion with a friend the other day about the nature of finance and money. It was hard to get into details as there was a lot of ground to cover. I thought it would be useful to summarise my position in a list of atomic propositions. The following is true for the UK but equally true for any country that issues it’s own currency at a floating exchange rate. This is all based on work by people like L. Randall Wray, Michael Hudson, Steve Keen, David Graeber and Robert Shiller.

1) Money is a representation of debt. If you buy a car off someone you could pay them with an IOU to the value of the car. The buyer could then at some time give you back the IOU and get something worth a car (from you.) The debt would be cancelled out and the IOU would disappear. Money is what happens when you implement some sort of system that allows some otherwise normal IOUs to be transferable. I-owe-yous become anyone-owes-yous. This means that the IOU given in payment can be given, in return for goods, to someone else.

2) There is more than one way to make IOUs transferable. Broadly speaking there are only two that I know of. The first is social money. This is based on optional trust. In this system the IOUs are transferable within a set of people who trust each other to honour the idea that those IOUs are transferable. These money systems tend to be small because they can only be as big as human personal social groups allow. The other system is central authority. In this system a central authority issues the IOUs, which are all claims on that authority rather than individuals.

3) If the debt that money represents is repaid then that money ceases to exist.

4) The thing that the government ‘owes’ currency holders is a reduction in their tax bill. The promise the government makes when it issues currency is that that currency can be used to pay any tax bill they issue.

5) The purpose of the tax system is to create demand for sovereign currency. By issuing a tax burden payable in some thing the government creates demand for that thing. From a macro-economic perspective it doesn’t matter how the tax bill is issued. Technically it doesn’t even need to be tax, it could be fines. It doesn’t matter if the tax bill is uniformly divided or levied on one individual, or anything in between. The fact that someone has to pay a tax bill with Xs means that demand for Xs is increased. If X has value even without the tax system, the X will be worth more with the tax system in place [1].

6) The government does not need to ‘raise’ pounds to spend pounds. The government issues pounds. All tax pounds it receives were issued by it in the first place. The government must issue pounds in order to tax them back.

7) The government cannot ‘save’ pounds. The government cannot save pounds for the same reason you cannot ‘save’ your own IOUs. You can’t have I-owe-myselfs.

8) Money creation is a process that ends with government issuing currency. It isn’t accurate to say that the government creates money. Most money creation happens without the government’s direct consent. The government can pursue policies that aim to issue new currency but only to the extent that the rest of the non-government sector is willing to participate. The only way the government can create money independently is by directly depositing currency simultaneously into a person’s bank accounts and into that person’s bank’s reserves (assuming people are happy to receive it). This, however, is not how most of the money in circulation comes to be. The other two processes are lending and spending. The first process is that people ask banks for loans, the bank choses to oblige or not (without the government having any real say), then the bank tries to get whatever reserves it feels it needs (historically the UK has had no reserve requirements). If the bank can’t get the reserves it needs from other banks it goes to the Bank of England and asks for, effectively, an overdraft. The BoE always obliges because to refuse would cause a credit crunch. At this point the ‘money’ is already in existence and the person receiving the loan could have already started spending it. The government then issues the currency making the money official. The other way the government can issue currency is through spending, buying goods and services, but note that the government can only buy what can be bought and generally can’t force anyone to sell, so it’s spending is limited by reality. It also can only buy things in it’s own currency that are for sale in it’s own currency. It can spend other countries currencies if it wants (and has some), but by doing so can’t issue pounds.

9) The economy is split into three sectors: the government, the domestic private sector and the world. This is a financially closed system by definition. The accounts of these three entities add up to zero (again by definition). From the perspective of the UK a foreign country is a bank that has an account in the BoE. Foreign firms have accounts in those banks. From this the rest of the world can be seen as just a sector of the UK economy. This sector is very similar to the domestic private sector. The main differences is that it internally isn’t subject to the rules of our government but conversely has no say in how our country is run. Our country is also part of the ‘rest of the world’ sectors in other economies (that is the BoE has accounts in other countries central banks).

10) For the non-government sector to run a surplus, the UK government must run a deficit. This is true by definition.

11) If the non-government sector is free to run a surplus then the government is not free to eliminate it’s deficit. This is true by deduction alone.

12) Activity funded with existing currency is repaying an old debt and issuing a new one. If I buy a car and issue an IOU, I owe you a thing worth a car. If that IOU is transferable then the person with my IOU can take it to someone else and exchange it for something, but in doing so they transfer the IOU to a third person. The second person is now settled., I now longer owe them anything, but the third person has a claim on me i.e. the IOU I issued. Spending money is the process of transferring a debt such the original issuer owes the final person in the chain, but the people in between are all left with a balance of zero (denominated in my IOUs). This is how our money works with the exception that my IOUs aren’t very transferable, but the government’s are. My IOUs are a bit transferable, so I can make these types of chains but only very short ones including people I know who trust me; however, I have little need to create such chains so never do. Instead I use the governments IOUs and become just another person in a chain, without having to worry about being the beginning or end.

13) Spontaneous activity requires issuing of new currency. From 12 it follows that the chain has to start somewhere. Someone has to simply issue the IOU from nothing. Linking to earlier points, this is usually how banks work. They start a debt chain then ask the government to insert themselves as the starting link, making the bank the second link in the chain.

14) Barter cannot explain expansion without charity. This is really an implication of 12 and 13. A business can be self-sufficient. It can pay for itself out of its income, but it has to have the income. It can’t generate an income before producing something. And it can’t produce something without capital. By deduction there has to be either a chain of debt that has to start somewhere (which disqualifies the economy as a barter economy) or someone must be simply gifting capital, which ultimately requires someone to be working for nothing. So a barter economy (lacking debt) that adheres to financial basics cannot expand.

15) There are good and bad ways to issue tax burdens and currency but the overall mechanics are the same. The government could choose to issue money by buying whatever it chooses. It could choose how it taxes and why. That will have varying social effects. The effects are an ethical matter not a macroeconomic matter. The choices will change the size of specific markets. For example if the government decided to always buy chocolate then chocolate markets would get a demand boost.

16) There is an optimum value for government surplus/deficit. There are pragmatic reasons to decide what a ‘good’ government deficit/surplus is, but those reasons do not include what the actual figure is. That figure is not always best when it is as low as possible and it is not always better when it is reduced. It is ‘best’ when it has the desired socioeconomic effects, which again are a matter of ethics not macroeconomics.

17) The UK government can not be forced to default on any debt denominated in pounds. It can never become insolvent. It can be forced to default on debts held in other currencies, but it can always issue the currency necessary to meet interest payments on debts in pounds.

18) The government set interest rates and therefor can always service public debt. If the UK interest rates were higher than growth, then the public debt would too quickly. But, again, the government sets interest rates so this could only happen if it chooses to let it happen.

19) Currency denominated in pounds can never leave the UK banking system. Often people talk about foreign held debt or dollars ‘in’ China or held by China. To be precise pounds cannot leave the UK banking system because they literally don’t exist outside of that system [4]. A foreign national bank can have an account at the BoE. In that account it can hold reserves or bonds. The currency can never be accurately described as being ‘in’ the foreign country. Pounds can only be spent in the UK financial system (or in a foreign country that uses pounds, which would be part of our banking system). Cash can be physically taken to foreign countries, but once there it becomes an asset in that country, not a currency. It can’t be paid into a bank account either, only bought in return for local currency if there is demand for pounds there. Virtual currency cannot be transfered to a foreign banking system either, the idea is meaningless. There is no meta-currency in which currency exchanges take place so currency exchange is either barter (floating exchange rates) or an arbitrary agreement to always issue a unit of currency in return for a unit of foreign currency. When a unit of currency is changed through a floating exchange rate it is really traded as an asset. When it is exchanged through a fixed exchange rate it is stockpiled by the foreign country and a new local currency unit is issued. The original unit of currency is still held in the currency issuer’s central bank (in an account controlled by the other country) and still entirely within that countries banking system.

20) A trade deficit does not export pounds. Following on from above, if the UK has a trade deficit (meaning it is at a net financial loss through trade, referred to as a current account deficit), this means that reserves are flowing into accounts in the BoE held by foreign central banks from other accounts in the BoE (usually mostly from domestic private accounts).

21) The UKs trade deficit is subject to interest rates that are set by the UK government just like domestically held public debt. Foreign central banks have accounts in the BoE, which pays interest just like any bank account. Higher interest can be earned by buying bonds (which are just like saving accounts). Those bonds, too, are just entries in an account at the BoE. Some think that this means foreign debt puts the UK government at some kind of default risk because of interest costs. The interest rates are, however, set by the BoE.

22) Refusing to issue currency to meet the non-government sector’s demand for it always translates into unemployment. Unemployment can be caused by there not being enough things to do or by a lack of demand but it can happen when there is plenty of both, which is usually the case in the real world [3]. Should the economy be in a position to expand its operations it needs finance. It needs finance for purely abstract reasons. It doesn’t ‘use’ finance in production. it can’t turn finance into anything. Because financial systems need to be tractable, that is they need to make mathematical sense, balance sheets need to add up etc., finance must be made available to allow new activity. In this case debt must be issued from nothing. If there aren’t enough pounds in circulation then, regardless of intentions or business models or demand or ingenuity, no new ventures can be undertaken without making our financial accounts mathematically nonsensical. Employing the unemployed, without taking wages from existing workers, requires new economic activity to happen spontaneously. This requires issuing currency, which in turn is the same as increasing the deficit (or reducing the surplus). Refusal to do that, through government policy, creates a situation in which the economy can’t employ more people regardless of any other factors [2].

23) The government pays interest on BoE accounts and charges interest on reserves it lends out in order to control interest rates. Reserve accounts at a central bank can pay interest, if the government decides to. It will also charge interest if a bank wants to borrow reserves. It doesn’t do this for fiscal reasons. It doesn’t need to profit off lending nor is it required to pay interest payments (often central banks pay zero interest on reserves). And it can ‘afford’ to pay as much interest as it likes. It does these things purely to control interest rates.

[1] This is why gold coins almost always circulate at prices above gold’s bullion value. There is an exception, however, which is when the material the currency is issued in is mixed. If the government issues coins in gold and copper, that both have the same nominal value (meaning the both count equally against a tax bill or fine), then people will obviously pay their tax bills in copper coins before gold ones. This extends to virtual currency that is just spreadsheet entries and has no real value.

[2] There is actually a very weird but accurate analogy: money is a unit of measurement of debt. In that sense it’s no different to meters or kilograms. Imagine that, for some bizarre reason, creating a road would require you to ‘have’ enough meters in the bank. Roads could be built only when old ones are ‘liquidated’ back into meters, or when new meters are issued. It’s easy to see what would happen if the government tried to ‘balance’ their meter account. It’s also bizarre to imagine a government stressing about having a ‘meter deficit’.

[3] I would argue that in the real world there is always something to do. ‘Bad times’ are identified by the very fact that there is a lot to do. Everyone always needs to eat and people always need shelter and security. Further, if modern life shows us anything it is that we can condition ourselves to demand literally anything.

[4] This is exactly the same as saying “points can’t leave a football tournament.” The points scored in a football tournament are meaningless outside of the tournament. You can ‘transfer’ a football point to a rugby point if tournament operators arbitrarily decide to honour the idea. In this case what would really happen is that the football point would disappear and the rugby point would be created. Or the two tournaments could use some kind of floating exchange rate by allowing bartering of points from the other tournaments.

I was looking at recently published statistics on employment and inflation (for September to November 2013). As far as I can tell, even if you take a pretty generous estimate of CPI inflation, we have less than 1% more people working but we are paying people about 1.3% less. We’re hiring more people by paying them less. And not only are we paying people less individually… we are paying the whole workforce less*!

How can any rational concept of recovery fit this data?

*If we hired 1% more people but paid the whole group the same amount you would expect the average wage to drop to just over 99% (which would keep the overall wage bill the same but make the average wage lower) but we’re paying about ~98.7%.